Sherwin-Williams (SHW) Double-Upgraded to 'Buy' at BofA Amid Robust Paint Demand Outlook

June 10, 2021 11:50 AM EDT
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Price: $268.16 -0.4%

Rating Summary:
    22 Buy, 12 Hold, 0 Sell

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    Up: 15 | Down: 13 | New: 24
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BofA Securities analyst Steve Byrne delivered a two-notch upgrade on Sherwin-Williams Company (NYSE: SHW) to “Buy” from “Underperform” as he sees a robust demand outlook with multiple tailwinds.

Byrne previously shared a more cautious view of the company as he thought the unprecedented DIY paint demand in 2020 could hurt contractor demand for this year.

“However, our third year of paint contractor surveys (see associated report) clearly indicated the opposite view, with backlogs well above 2019 levels. This view is supported by robust US homebuilding trends, home resale activities, and our colleague Elizabeth Suzuki’s work on home improvement trends that could collectively lead to multiple years of robust US paint demand. Sherwin’s 4,774 stores in The Americas Group (TAG) will be a key benefactor of these trends,” the analyst said in a note sent to clients.

BofA’s survey shows that contractors expect price increases of over 5%. Still, they are in the market to buy about 8% more paint in 2021 compared to two years ago. This is partly because of the backlogs that are 5% up compared to 2019, and as much as 9% higher for large contractors.

“Commercial backlogs are also improving. Contractor loyalty to SHW stores appears to be gaining traction across our surveys, driven by a variety of factors, with favorable pricing notably more important than prior surveys. This observation is interesting and suggests Sherwin’s decision to not push another round of paint price increases until August could reinforce this loyalty, driving more share gains.”

Industry experts are highlighting growth opportunities from innovation.

“We see innovation as a key growth driver in SHW’s Performance segment, rather than major M&A, as we do not expect any acquisitions to meaningfully dilute the earnings dominance from TAG. Our raw material aggregator suggests that coatings raw material costs could rise by 10% in 3Q and run as high as 16% for industrial coatings. The Consumer Brands segment faces tough y/y comparisons given strong DIY demand last year and there is a possibility that sales volumes are constrained on raw material procurement challenges,” the analyst adds.

His new 2022 EPS estimate is $10.75 and helps shape a $325.00 per share price target (the prior $222.00 per share).

Shares of the company are up 0.2% in today’s trading session.

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